Property & Wealth

Real estate’s rays of sunshine as storm clouds gather

The real estate sector offers some rays of sunshine as storm clouds gather over the South African economy, but the noise of political thunder at times distracts from even that hope.

Most leading economists are predicting a storm of economic hardships in the form of increasing food inflation triggered by an escalation in fuel and related costs on the back of a depreciating rand.

A formal junk credit rating by rating agencies or not, some argue that the market has effectively already bestowed it on South Africa, and the country is facing a real prospect of slipping into an economic recession.

On the more fundamental level, this comes at a time when the waiting lists for housing are getting longer and accommodation rentals are rocketing off the back of the higher cost of electricity and water and the steady decline in South Africa’s capacity to hand over well-built houses to those on the waiting lists for RDP and other state-sponsored homes.

From the news filtering through on a daily basis it is clear that a wave of enormous dissatisfaction is spreading across the country as we have started preparing for the local government elections in August.

The target of this often violent anger is invariably some or other organ of state – mostly some municipal structure – failing in the service delivery expectations of citizens.

The frustrations of the populace are understandable if one considers the number of black families, estimated to be somewhere between five and seven million, who are living on urban property, owned by municipalities.

Using the right tools

Temba Nolutshungu of the Free Market Foundation has mooted that, rather than look for a more radical expropriation tool as in the Expropriation Bill, which has just been passed, government should instead look to transfer those municipal properties to their occupants.

In one fell swoop the government will not only alleviate the frustrations of a large slice of our population. And it would transfer so much wealth that it will have a major impact on the faith of people in SA’s hard-won democracy.

It might just also jump-start the country’s limp economy and offer government an opportunity to reclaim some moral high ground for initiating economic transformation.

In reality, though, the government remains hopelessly bogged down in its own red tape, which is threatening to scupper even the most generous of schemes.

For instance, the Sub-division of Agricultural Land Act – in the interests of food security and to prevent the large scale development of townships on farmland – prohibits owners of agricultural land from subdividing it, from cutting it up into smaller units.

In order to buy a plot of land from a farmer, you need to get the consent of the Minister of Rural Affairs and Land Reform, which is understandably a lengthy process.

Even when it comes to RDP housing you find poor people being restricted by outdated laws, restricting the new owners from transferring their asset for an extended period.

Rays of sunshine

Where then, may you ask, are the rays of sunshine we were talking about?

But they are there, like the story of a group of five professionals from Zimbabwe who are successfully farming the fields that a farmer had mothballed due to the drought and his inability to make money from it.

Albert Zinhanga and his friends had the good fortune to get chatting to the landowner in Malmesbury when they bought an ox for slaughter. During the conversation they enquired about the empty land they noticed and the farmer then offered it to them free for the year to sow and plough, even tendering the use of his equipment, while publicly he was pretty certain that they would not succeed.

The group gladly accepted the farmer’s generous offer.

Zinhanga, a school teacher in Parow, explained that they started a market garden and planted three hectares (or 7.5 acres) of land with broccoli, cauliflower, maize, spinach and tomatoes.

The neighbouring farmers weighed in with advice and introduced them to the Epping Market in Cape Town where they could sell their produce for the going rate.

When their maize crop ripened, the surrounding farmers were stunned by its size and good health. Zinghana explained that their secret was to use cow dung in addition to the normal fertiliser.

After their baptism in year one, the farmer was kind enough to offer them the land for rent at R1 200 per hectare, which the partners were happy to accept and they then added a leaf vegetable called tsunga to their crop list.

The group, who called themselves the N7 Farmers, all have full-time jobs and mostly had to rely on weekends to get the farming done.

They now have a Malawian manager and five other employees to keep the production moving.

For their sterling efforts the N7 Farmers recently won the small business of the year award and are quoted as saying that they never dreamt that one day they would be farmers.

People have not lost hope

An article last week by Ray Mahlaka on Moneyweb tells of how, after many years of angst regarding investing in SA’s housing market, listed property investors have only recently warmed up to residential-focused companies.

Dealing with delinquent tenants and SA’s onerous eviction legislation which typically favours tenants – making residential property investments management intensive – has not created a favourable track record for the sector.

Furthermore, SA’s housing market is still recovering from the five-year-long slump prompted by the 2007/8 global credit crisis resulting in humdrum house price growth, banks closing mortgage loan taps and the glut of distressed properties on the market. These are some of the concerns that have left investors nervous about residential investments.

But a recently-listed real estate company is piquing the interest of investors in SA’s listed property sector, worth more than R400 billion.

Focusing on sectional title residential estates in metropolitan areas, it is cashing in on the insatiable demand for lock-up-and-go residential units. And institutional shareholders like the Public Investment Corporation, Investec Asset Management, Abax Investments, 36ONE Asset Management, Stanlib and Visio Capital have supported it.

The company’s share price has jumped by 22.65% the week before last after it reported a 68% rise in headline earnings per share to 131 cents for the year to 29 February 2016. It also declared profit after tax of R559 million – exceeding its pre-listing forecast of R542 million by R17 million. These were the company’s maiden results following its listing on the JSE’s main board in October 2015.

The bottom line is, there is still life in South Africa’s real estate sector.

Reality check

It is, however, as Donwald Pressly, editor of the Cape Messenger, wrote last week, the passage of the Expropriation Bill that has come under scrutiny from all sides.

The timing of the bill also came into consideration, especially as the country is staring a recession in the face, while ratings agencies S&P and Fitch were due to meet last week to decide on the country’s sovereign debt.

He wrote that it sends the wrong signals just at a time when South Africa needs to be assuring investors – both local and foreign – that their money won’t be chucked out of the window or stolen from them.

The passage of the Expropriation Bill was thoroughly bad news for the economy and for local and foreign business confidence in South Africa.